The .za SLD Cost and Fee Structure: Wholesale Fees

Wholesale Fee Review: Co.za, Net.za, Org.za and Web.za

On the 14th of September 2018 the ZA Domain Name Authority (ZADNA) announced that it would be reviewing the Wholesale Fees for .za second level domains (SLDs). The announcement was accompanied by a request for public submissions, with a corresponding deadline of 15 October 2018. Submissions must be sent to submissions@zadna.org.za.  

The Wholesale Fee, what does it mean?

The Wholesale Fee is the annual fee paid by a domain name registrar to the registry operator (ZACR) for each .za SLD (i.e Co.za, Org.za, Net.za and Web.za) registered and/or renewed by them.

Setting an appropriate Wholesale Fee is an important aspect of a healthy domain name ecosystem as it can potentially impact on the sustainability and administration of critical Internet resources. Furthermore, the Wholesale Fee will undoubtedly have an influence on the retail pricing of domain names (i.e. fees charged to the public) and will therefore impact on the perceived affordability and attractiveness of these SLDs. However, there is more to the Wholesale Fee than meets the eye… it is simply the tip of the iceberg and it would be helpful to better understand the cost structures of the .za SLD space in order to make a more informed contribution to the debate.

In theory the Wholesale Fee is intended to cover the three primary cost centres within the .za SLD ecosystem, namely:

The Wholesale Fee for .za SLDs is currently set at R45.00 (forty five rand) per year, excluding VAT. For the sake of clarity, it is this Wholesale Fee the regulator wants to review.

The total Wholesale Fee revenue, collected by the registry operator, represents the top-line revenue entering the formal (or regulated) domain name environment. From this revenue, the registry operator (ZACR) must ensure that it is able to provide a sustainable, reliable and accessible registry operation for the .za SLDs. In practice this means that the Wholesale Fee revenues should, as a minimum, be able to cover the three primary costs centres identified above.

In order to calculate the total revenue earnings from the Wholesale Fee, simply multiply the total number of .za SLDs by the Wholesale Fee. In the present instance this amounts to 1,2-million SLDs @ R45.00 = R54-million per annum.

Note: The total annual revenue entering the formal (.za) domain name environment is approximately R54,000,000 (fifty four million rand). It follows that this amount can increase or decrease depending on the number of SLDs and the value of the Wholesale Fee at any given time.

It is also important to note that the Wholesale Fee is determined by the regulator (ZADNA) in consultation with all key stakeholders. In theory, ZADNA is meant to make this determination in terms of an established regulatory framework prescribed under chapter 10 of the Electronic Communications and Transactions Act (ECTA). This regulatory framework is yet to be established, notwithstanding that it has already been over 15 years since the ECTA was first promulgated.

Moving on…

It follows that in setting the Wholesale Fee, ZADNA will likely consider the following criteria (amongst others):

Cost Centre #1 - The Registry Operator:

The registry operator (ZACR) is appointed as the primary operating entity within the .za SLD space and its role and responsibilities include (amongst others):

In addition to its own operating costs, the registry operator must also cover the RSP Fee payable to the technical service provider and the Registry Fee payable to the regulator.

Amending the Wholesale Fee will depend on whether there is an anticipated increase, or decrease, in the operating costs of the registry operator, including the RSP and Registry Fees. Any material changes to any of these cost centres will likely have a knock-on effect on the Wholesale Fee.

Consideration: Does the registry operator anticipate that its operating costs will increase significantly in the coming year, thereby necessitating an increase in the Wholesale Fee? We can only assume that any anticipated increase would have been motivated to the regulator who would have in turn disclosed this to the public and stakeholders as part of this fee review exercise? As no information has been provided at this stage, we should reasonably assume that the operating cost of the registry operator will remain within sustainable parameters.

Cost Centre #2 - The Technical Registry Service Provider and the RSP Fee:

Ever since the establishment of the central registry in 2011, the parties have engaged the services of a technical registry service provider (RSP) based in South Africa. This is not a unique situation to South Africa and many gTLD and ccTLD registry operators around the world, make use of RSPs for their specialised domain name technical services and infrastructure, including countries such as India and Australia to name a few.

In terms of the .za SLDs the appointed technical registry service provider (RSP) is Domain Name Services (Pty) Ltd (DNS ZA), of which I am admittedly the chief executive. DNS ZA has its roots in the Co.za domain name space, dating back to 1995. It is one of a limited number of companies globally, certainly the only one on the African continent, that provides the specialised technical registry services and infrastructure to run a large EPP domain space, such as the one required for the .za SLDs. DNS ZA also provides its African honed technology and services to international clients, running several gTLDs. But I digress…

The current RSP Fee is R15.00 per .za SLD, per year. This effectively means that of the total wholesale revenue generated by the registry operator, only one-third (⅓) is utilised to provision, maintain and support the core technical registry services and infrastructure for the .za SLDs. This amounts to roughly R18-million per year that must cover the RSP’s specialist technical resources, including software engineers, system, network and dns administrators, business analysts, policy and compliance officers and business and customer support resources. In addition, the RSP must also cover the costs of maintaining the primary and secondary data centres, remote monitoring sites, hardware and equipment costs, power usage, redundant data links, 3rd party software, unicast, anycast and security infrastructure, training, travel and general office expenses etc.

As a matter of interest the costs for the .za SLD technical services and infrastructure is highly competitive by international standards:

Zone:

Zone Size:

RSP Cost PA: (approx)

.za (South Africa)

1,200,000

US$1,247,767

.au (Australia)

3,200,000

US$9,600,000

.in (India)

2,200,000

US$2,420,000

.org (gTLD)

10,000,000

US$30,000,000

Consideration: Does the technical registry service provider anticipate that it will need to increase the RSP Fee in the near future? The short answer is no, provided that there are no additional extraneous services required from the RSP. As a matter of interest, the RSP Fee has remained unchanged since 2011 notwithstanding that a significant portion of the RSP cost base is impacted by FOREX volatility and inflationary pressures .  

Cost Centre #3 - The Regulator and the Registry Fee:

In addition to its own operating costs and the RSP Fee (see above), the registry operator (ZACR) must also cover the Registry Fee as prescribed by the regulator (ZADNA). Although this fee should in theory constitute a licence fee in terms of ECTA, as mentioned above, the regulatory framework for licensing has yet to be established. As a result the payment of a Registry Fee is prescribed in terms of a written "registry operator" agreement between the ZACR and ZADNA, which also determines that ZADNA has the sole right to set both the Registry and Wholesale Fees.

In my opinion, this is not the most suitable long term solution for the .za SLD space, especially in the absence of an established regulatory framework. Given the current circumstances the determination of both Registry and Wholesale Fees by ZADNA must walk a tightrope between public sector accountability and private sector competition law principles.

Moving on…

According to my understanding, the Registry Fee prescribed by ZADNA has, up until recently, been fixed at R7.00 per domain name per year, which is the equivalent of approximately R8-million in annual revenue from the registry operator. There is however some confusion around this issue because ZADNA’s 2018/2019 (interim) financial budget appears to peg the Registry Fee at R12.00 per domain name per year. This equates to approximately R14,4-million in annual revenue from the registry operator. If the Registry Fee has indeed changed from R7.00 to R12.00 (or vice versa), this would constitute a 75% adjustment in top-line revenue for ZADNA without any commensurate change to the Wholesale Fee?

Judging by the most recent annual financial budgets released by ZADNA, it appears that the Registry Fee, is generally linked to a cost recovery model. What this means in practice is that if ZADNA’s operating budget is likely to increase it will likely demand a higher Registry Fee from the registry operator (ZACR) to fund its operations (and vice versa). Due to the fact that the registry operator (ZACR) generates its revenue from the Wholesale Fee, it would then also make sense that the Wholesale Fee may need to change in order to accommodate the increase in the Registry Fee?

Conclusion:

There are several factors that inform the Wholesale Fee for .za SLDs, namely cost recovery, affordability and competitive pricing. On the latter two criteria, I believe that the performance  of the .za SLDs over the past 5-years (820,000 increased to over 1,2 million) supports the view that we are currently well positioned in terms of our affordability and competitiveness.

That said, will it severely impact our affordability and competitiveness if we increase the Wholesale Fee from R45.00 to R50.00… or even to R60.00? I don't believe that it will, however this is ignoring the elephant in the room... i.e the primary consideration behind the Wholesale Fee review is cost recovery.

The real issue that we need to address is whether the Wholesale Fee is adequately set to sustain the operational and administrative costs of the .za SLD and TLD space. In order to make an informed contribution on this debate, the regulator should clarify whether it anticipates any substantial increases (or decreases) in the underlying operating and administrative costs of these namespaces.